Your Social Security Benefit May Be Bigger Than Expected When You Retire, According to a Recent Study

Social Security is often the largest source of income for retired workers. But a recent study published by the National Bureau of Economic Research found that older adults (ages 51 to 65) tend to underestimate their future Social Security benefit, sometimes to a significant degree.

• Half, or 50%, underestimate their annual Social Security income by more than $1,116.
• One-quarter, or 25%, underestimate their annual Social Security income by more than $5,167.
• One-tenth, or 10%, underestimate their annual Social Security income by more than $10,659.

A bigger-than-expected benefit is certainly a good surprise, but workers in their 50s and 60s should understand how much income Social Security will provide. Without an accurate estimate, it is impossible to plan for retirement. People who retire too early may struggle financially, and people who retire too late may regret staying in the workforce longer than necessary.

Read on to learn how Social Security benefits are calculated and how to estimate your future payout.

Image source: Getty Images.

Here's how Social Security benefits are calculated

Your Social Security benefit is calculated based on work history, lifetime earnings, claiming age, and full retirement age (FRA). The process is outlined below.

1. Your lifetime earnings are indexed to the national average wage level to account for changes in living standards that occurred during your career.
2. The indexed (inflation-adjusted) earnings from the 35 highest-paid years of your career are converted to a monthly average called the average indexed monthly earnings (AIME) amount.
3. A formula is applied to the AIME to determine your primary insurance amount (PIA), which is the benefit you will receive if you claim Social Security at FRA.
4. The PIA is adjusted for early or delayed retirement. You will get less than 100% of your PIA if you claim before FRA and more than 100% of your PIA if you claim after FRA.

There are two qualifications to the process described above. First, eligibility for retired-worker benefits begins at age 62, so you cannot claim any earlier. Second, delayed-retirement credits stop accumulating at age 70, so it does not make sense to claim any later.

The chart below shows the relationship between birth year and FRA. It also shows the benefit (as a percentage of the PIA) retired workers would receive if they claim Social Security at ages 62 and 70. In other words, it shows the smallest possible and the largest possible benefit for each age group.

Data source: The Social Security Administration.

As shown above, delaying Social Security benefits can substantially increase the payout. Workers born in 1960 or later will receive 70% of their PIA if they claim at age 62, but they will receive 124% of their PIA if they claim at age 70. Put differently, workers born in 1960 or later can increase their Social Security benefit by 77% by claiming at age 70 rather than age 62.

Here's how to estimate your future Social Security benefit

Here I'll discuss two ways to estimate your future Social Security benefit. The first is faster but less accurate, while the second requires more effort but gives a more precise projection.

Method 1: You can estimate your replacement rate using an annual report from the Social Security Administration. The term replacement rate refers to the percentage of pre-retirement income that Social Security replaces. For example, if you earned an average of $50,000 per year (adjusted for inflation) during your career, and then you received $20,000 in Social Security benefits per year, your replacement rate would be 40% ($20,000 divided by $50,000).

The most recent report from the Social Security Administration was published in May 2024. It estimates the replacement rate for low earners ($29,813 in 2023 dollars), medium earners ($66,251 in 2023 dollars), and high earners ($106,002 in 2023 dollars) who claim Social Security at full retirement age this year. The estimates are listed below.

• Low earners: Social Security will replace 57.3% of pre-retirement income.
• Medium earners: Social Security will replace 42.6% of pre-retirement income.
• High earners: Social Security will replace 35.2% of pre-retirement income.

This method is crude for two reasons: (1) Most people do not fit neatly into those three categories, and (2) It does not account for early or delayed retirement, both of which would change the replacement rate.

However, the percentages shown above are still useful in estimating your future benefit. For instance, if your career-average earnings fall between $29,813 per year and $66,251 per year (in 2023 dollars), your replacement rate will be somewhere between 42.6% and 57.3% if you claim Social Security at FRA this year.

Method 2: You can create a my Social Security account. It will automatically populate your past earnings -- employers are required to pass that information to the Social Security Administration -- and use those figures to provide a personalized estimate of your future benefit. The account serves other purposes, too. For instance, the my Social Security portal lets you check the status of your benefits application, set up direct deposit for benefit payments, and review your annual Social Security income for tax purposes.

This method requires a little more time, but the estimate is far more accurate because (1) the my Social Security portal incorporates your actual earnings, and (2) the system lets you estimate your future benefit at different claiming ages.